BCE, Telus, Rogers: Ottawa's bid to boost competition at risk

Predicting the future of the wireless industry has become a new favourite national game, but while the fate of a trio of startup carriers is anyone’s guess, the odds of the federal government emerging bruised are looking good.

In the lead-up to a November auction of spectrum — the radio airwaves providers need to build their networks — Ottawa’s plan to promote a fourth competitor in every market to keep prices in check and even the auction itself could be at risk.

Analysts say Industry Canada is in a tough spot as it must soon decide whether to allow the sale of valuable spectrum licences won in the 2008 advanced wireless services (AWS) auction while the viability of some of the companies that bought those airwaves is questionable.

“I’m glad I’m not the minister because you’re damned if you do, damned if you don’t when it comes to this decision,” Dvai Ghose, head of research at Canaccord Genuity in Toronto, said in an interview.

Despite the turmoil facing new entrants Wind Mobile, Mobilicity and Public Mobile, Industry Minister Christian Paradis has maintained the government’s strategy for the industry is succeeding.

“Consolidation of course might occur, but on the other hand, I think we put the best policies in place in order to enhance the fact that we can have a fourth player in each region of the country in terms of competition and more investments,” he said during a conference call with reporters last Monday, according to a government transcript of the call.

“I think we are on the right track… in terms of policy,” he added. “Of course, it’s a work in progress. We will see what’s going on, but I still remain confident that we will achieve our goal.”

The minister must soon decide whether to allow Shaw Communications Inc.’s proposed sale of its AWS spectrum to Rogers Communications Inc., which dominates the wireless market along with BCE Inc. and Telus Corp.

Calgary-based Shaw bought those airwaves under the set-aside provisions of the 2008 auction to allow for new entrants to the market, but it never built a wireless network and the spectrum has gone unused. Wind Mobile and Mobilicity also picked up AWS airwaves during that auction while the smallest of the startups, Public Mobile, bought spectrum not subject to set-aside provisions.

The set-aside licences came with five-year moratoriums on their transfer or sale and those provisions are set to expire next year.

“You know, the intent of the policy was not to – it was not to have these set-aside spectrum to end in the hands of an incumbent,” Mr. Paradis said on the conference call. “That being said, now we decided to launch consultation with the industry for a licence transfer and of course now the decisions have [got] to be made.”

The minister was referring to a consultation underway on the rules around spectrum transfer. Reply submissions are due May 3 and the government is expected to set a policy outlining the criteria for transfers shortly after that.

Clarity on whether the government will allow the transfer of set-aside spectrum to one of the three incumbents is critical for anyone considering investing in Canada’s wireless market, and with bids for this year’s auction of 700-megahertz spectrum due in June, the minister is under pressure to take decisive action.

“For Industry Canada, it’s a case of Catch-22,” Scotia Capital analyst Jeff Fan said in a research note last week. “If it doesn’t allow the transfers, it risks legal action. If it allows, we have consolidation.”

He noted that the companies that hold set-aside AWS licences have told the government that disallowing their transfer or sale would violate a contractual obligation and they could sue, creating a messy situation that could scare away the already short list of investors who may be interested in Canada’s wireless market.

“Imagine Wind and Mobilicity suing the government for allegedly breaking contractual terms on the licences they obtained four years ago,” Mr. Fan wrote. “We think this development would not help Industry Canada’s case of attracting new strategic investors.”

Mr. Ghose agreed that denying the sale of set-aside AWS spectrum to the incumbents would make attracting new capital, whether foreign or domestic, even more difficult as investors will see no obvious exit strategy.

“Do you allow the incumbents to buy all that set-aside spectrum and all your plans for wireless competition have essentially been defeated? Or do you stop it and then [the new entrants] find it even more difficult to secure financing? It’s not a very enviable position,” he said.

What’s more, Mr. Ghose said, the government now faces the unhappy prospect of not attracting a fourth bidder for the November auction in Ontario, British Columbia and Alberta, the provinces where the startup carriers operate.

Regional wireless providers operate in most other parts of the country, with SaskTel and MTS in the Prairies, Quebecor Inc.-owned Videotron in Quebec and Eastlink’s newly launched wireless business covering parts of the Atlantic region.

Like Bell, Rogers and Telus, those companies have diversified businesses that do not rely solely on their wireless divisions and they are expected to come to the table to bid for spectrum in their respective regions.

But it is far less likely the new entrants or a new strategic or financial investor will do the same.

Vaughan, Ont.-based Mobilicity is staggering under debt and facing a court case brought by its own bond-holder Catalyst Capital Inc. to set aside a $75-million second-lien financing it secured this year.

Wind Mobile’s foreign owner VimpelCom Ltd. looks ready to get out of Canada and has put its stake in its Toronto-based subsidiary up for sale, despite the fact Ottawa has yet to approve a transfer of Canadian founder Tony Lacavera’s ownership interest to VimpelCom.

Mr. Lacavera is said to be one of the interested bidders partnering, through his holding company AAL Corp., with Accelero Capital, an investment vehicle operated by the former head of VimpelCom-owned Orascom Telecom Holdings SAE, Naguib Sawiris.

“I’m thinking increasingly there’s a chance [the government] delays the auction,” Mr. Ghose said. “Because the ultimate embarrassment is in Ontario, B.C. and Alberta; there’s no player that turns up for that fourth licence, which has been reserved for a new entrant.”

“Meanwhile, the government has been relatively populist during this whole phase about the big, bad incumbents and promising incremental competition. I’m afraid it could be over-promising and under-delivering,” he said.